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Ups Versus Fedex Analysis Case

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The purpose of this memo is provide a recommendation on whether to invest in FedEx or UPS, given that the air transportation market in China is now open to both companies. Outlined in this memo are an assessment of the strategic approaches and an evaluation of the financial and non-financial performance of both companies, which led to the conclusion that UPS is the superior investment opportunity.

1.0 Strategic Approaches for FedEx and UPS

FedEx and UPS are package-delivery companies that together provide supply chain, transportation, logistics and related information services. FedEx has expanded from operating in 25 U.S. cities, to serving international markets. Similarly, UPS initially operated just within the U.S. before expanding into Canada, Europe, Latin America and most recently, China. FedEx and UPS target the same markets and compete for presence in them.

FedEx and UPS have some key differences with regards to their strategic approach to business (see Table 1). FedEx, which is regarded as an innovative, entrepreneurial, and operational leader has a strategy that focuses on providing high quality services to its customers. FedEx’s technological innovations, including the COSMOS interface, enables it to provide timely delivery service to its customers and large clients.

UPS has a strategy that is driven by its quest for efficiency and cost reduction. In the past, UPS was regarded as “financially and operationally conservative” due to its reserved approach to investing in information technology. It was considered an industry follower, as it did not come up with unique processes to distinguish itself from its competitors. Since its IPO in 1999, UPS has made efforts to change its image through aggressive information technology investments and acquisitions.

FedEx and UPS have goals of being in a strong financial position and providing high returns to shareowners. This is why both companies have been finding ways to cut costs through economies of scale and use of information technology. The strong rivalry between FedEx and UPS has led to matching each other in terms of capital investment expenditures and services they offer. Both companies have branched out to provide logistics services to large corporate clients and are also interested in expanding into the Chinese market, where there is high potential for growth.

2.0 Performance Measures

2.1 Financial Measures

2.1.1 Financial Statement Information

Financial performance measures that can be obtained from a firm’s financial statements consist of absolute data and financial ratios. Absolute measures such as income, net assets and equity, reveal trends and allow a company to be compared to its performance over time, while financial ratios, including return-on-assets and current ratio, adjust for scale and allow for comparisons of different-sized companies (Libby, et al., 2008).

Financial ratios are ideal to compare FedEx and UPS, since UPS has $13.5 billion more in assets and $11 billion more in revenues than FedEx. Please see Table 2 for a comparison of the most common and widely used financial ratios. UPS is outperforming FedEx in liquidity, solvency and profitability measures, while lagging in activity and growth. This would indicate that UPS has superior financial performance, but the disadvantage of using financial statement information is the use of book values, not market values, which are historic. As a result, the information is not as relevant, and inferences are backward, not forward-looking. Another weakness is that the measures are driven by information influenced by GAAP decisions and estimates, which might incorporate management bias and error (Scott, 2009).

2.1.2 Share Price Information

More relevant measures, such as those obtained from the stock price performance, can be used to analyze FedEx and UPS. Earnings-per-share (EPS) is the most widely used ratio and communicates how much profit is generated on a per-share basis while Price-Earnings (P/E) ratio conveys the market’s value of a firm’s share relative to the earnings actually generated (Scott, 2009).

EPS should be interpreted over time, and both FedEx and UPS have steadily increasing EPS since 1992. Share price for both firms has risen steadily with UPS overtaking FedEx following the IPO in 1999 (see Appendix 2). In comparing FedEx and UPS’ P/E ratios, UPS has been slightly higher than FedEx since its IPO in 1999 (see Appendix 1). Another measure that can be used is the cumulative compound annual return (CCAR), which shows the percentage gain from holding each company’s share. At year-end 2003, the cumulative annual return for UPS and FedEx was 705.95% and 528.02%, respectively, indicating that the return from holding UPS’s stock was nearly 200% more than FedEx’s for the same period. While both firms exceed the S&P 500 index in this measure, UPS again outperforms FedEx.

In general, the advantage of the aforementioned measures is that they are linked to the market price of shares, which is relevant. Also, since a company with higher and more certain earnings forecasts will have a higher P/E ratio, this measure is risk-adjusted (Libby, et al., 2008). EPS is a fairly objective measure, as the ratio uses financial statement figures that can be compared over time. The main disadvantages are that GAAP decisions influence the earnings figure that drive these measures and that P/E ratios can be interpreted in various ways, leading to inconsistencies.

2.1.3 Economic Value Added and Market Value Added

Economic Value Added (EVA) and Market Value Added (MVA) should be analyzed as they are tied to market value, they allow for comparisons amongst investments, and EVA is risk-adjusted. EVA is the excess of Net Operating Profits After Taxes (NOPAT) over the cost of capital or the spread between the Return on Net Assets (RONA) and the WACC. If the return from the firm’s capital investments is greater than the cost of that capital, RONA will be exceeding the minimum return required by investors and value will be created. MVA is the present value of all future EVA, meaning that if RONA is expected to exceed WACC into the future, MVA will be positive.

Appendix 3 shows how the cumulative EVA for UPS has been increasingly positive since 1998, while Appendix 4 shows a very large negative cumulative EVA for FedEx. While both companies’ MVAs are positive, UPS’ has increased at a much higher rate and is nearly 6 times higher than FedEx.

When share price is graphed alongside EVA for UPS, the two measures appear to be correlated, but this is not the case for FedEx. Although FedEx has a large negative EVA, the share price

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